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Tuesday, September 9, 2008

Value Investing Today: Chp 4: Characteristics of Value

Brandes writes that typical value investments share certain characteristics. In particular, these investments will be in companies with understandable products and services, have consistent earnings and have strong financial health.

Investments need to be understandable to the investor so that the strengths and weaknesses can be properly evaluated. Brandes sees knowledge as a defense mechanism against being persuaded by media and other forces into doing something foolish with an investment. The companies should have long track records of stable earnings but could have some temporary downturns. Low debt levels in companies will help protect the company during industry or company specific downturns. Brandes rough rule of thumb (which doesn't apply to all industries) is that a company should not have more debt than equity.

Some of the suggestions Brandes gives to find value plays include looking for companies in out-of-favour industries, companies in geographies experiencing hard times, stocks making new price lows, stocks experiencing steep price declines, value play media articles and value portfolios of other value investors. As a value investor, you are striving to uncover opportunities where an overreaction in the marketplace has occurred to a temporary situation.

Brandes suggests avoiding the following scenarios: businesses that are capital intensive, companies that frequently chase new hot ideas and companies without a disciplined approach to cost controls. He also suggests being careful with government regulated companies and companies with dual class shares. These are only some of the suggestions Brandes makes in the chapter.